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3 reasons why Navitas Limited shares sank more than 30% yesterday

Education provider Navitas Limited (ASX: NVT) has seen its shares fall more than 31% yesterday, after the company announced that it will lose its role with Macquarie University from 2016.

Navitas provides pathway programs for students to gain entry into Macquarie University, as well as more than 30 other colleges in eight countries. As a result of the loss of the arrangement, Navitas will take a one-off non-cash impairment to goodwill of up to $40 million.

The company says it won’t affect this year’s earnings, but is likely to impact the second half of the 2016 financial year and the first half of 2017, but could be mitigated by other growth initiatives.

Here are three reasons the shares sank…

  1. Nativas shares were expensive before the announcement, showing the dangers of investing in high P/E ratio stocks. At 34 times earnings and expected growth of just 9% this financial year, shares were priced for perfection.
  2. Investors will be wondering how many other universities and colleges may consider taking their pathway programs in-house like Macquarie University. Speaking to Sky News Business yesterday, CEO Rod Jones says it was a one-off and he had no indication that others are considering the same move.
  3. Rising competition from a number of other ASX-listed education providers, including Academies Australasia Group Ltd (ASX: AKG), Vocation Ltd (ASX: VET), Seek Limited (ASX: SEK) and Redhill Education Limited (ASX: RDH), as well as Massive Open Online Courses (MOOC), which allow students in any country access to online learning, with much of it free. Education is becoming a commodity, and this may be the first sign that the company’s business model may have some structural issues.

The share price fall may have been overdone, but unless Navitas can replace the lost revenues, it may still be expensive. Compounding that is the worry that the business model may be broken – something it seems investors are more concerned about.

 

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